The US role with OPEC

April 24, 2000
It is important to remember that oil production was destined to rise and that the prices of crude oil and petroleum products were destined to fall.

It is important to remember that oil production was destined to rise and that the prices of crude oil and petroleum products were destined to fall. The Organization of Petroleum Exporting Countries knew better than to keep the market short of crude.

It is also important to remember that the US government was destined to play a role in OPEC's late-March agreement to raise production quotas. The extent of that role, however, deserves attention.

Oil diplomacy

According to Energy Sec. Bill Richardson, this month's production increase happened because of US exertions.

"The administration's diplomatic efforts should result in an immediate production increase [of] 1.8 million b/d," he said Apr. 11 at the National Ocean Industries Association annual meeting in Washington, DC. He was referring to his own high-profile visits with the oil ministers of key OPEC members before their meeting in Vienna, which he followed up with telephone calls during quota negotiations. The phone calls rankled at least some of the OPEC ministers. Iran's representative, who didn't sign the quota accord but raised production anyway, openly criticized the intervention (OGJ, Apr. 3, 2000, p. 25).

For Richardson, it was all in character. He has a reputation for swashbuckling into touchy situations where his welcome is suspect. And he does nothing to discourage speculation that he might become Vice-Pres. Al Gore's running mate in the presidential election next November.

So Gore looks good to voters if the administration can win credit for bringing oil prices under control. And Richardson looks good to Gore if the message sells.

The flaw in this public relations strategy is that OPEC would have raised production anyway. Quota cheating had already begun when the ministers met. Because of it, the production gain attributable to the quota adjustment is more like 700,000 b/d-not the 1.8 million b/d Richardson claims. Production was destined to increase because savvy OPEC members knew from experience that crude prices near $30/bbl couldn't last.

With or without Richardson's pesky phone calls, and despite the usual premeeting statements to the contrary, OPEC went to Vienna to raise output. It served no interest of the production heavyweights to do otherwise. For Richardson to proclaim rising production and falling oil prices as diplomatic triumphs of the Clinton administration is an election-year stretch.

That's not to say that he should have stayed in Washington schmoozing truckers there to protest diesel prices. In the OPEC states, oil production is no trifling political matter. Neither is the quality of relations with the US. A timely visit from a US dignitary can provide valuable political comfort to a producing-nation oil minister wanting to pursue national economic interests not immediately evident to the local population. But there's a difference between friendly consultation and bullying. Iran, with its historic aversion toward US meddling, apparently thinks Richardson crossed the line. It probably isn't alone.

The effects

How might this affect future OPEC negotiations? Maybe not at all. OPEC ministers understand politics. They also benefit from the occasional reminder about price tetchiness in the world's biggest oil market. At the next turn of oil demand, they'll put aside political grudges and do what seems to make most economic sense. They'll just think twice about inviting American officials in for tea and photographs beforehand.

Whatever damage may have been done will confine itself to the US. If Richardson's grandstanding has the desired political effects, it will mean that Americans ascribe to their government market influence that it doesn't truly possess. It also will mean that they countenance price manipulation by the state such as they would never abide from private companies. From such philosophical confusion, constructive governance almost never emerges.